March 27, 2020
The COVID-19 crises is continuing and there is no clear time frame for when the current restrictions on day to day activities will be lifted or even lessoned. To become and remain compliant, businesses of all sizes have been forced to change their daily operations. Some have been able to come into compliance after making minor changes; some have been forced to significantly revise how they are doing business; while still others have been forced to shut down completely. Regardless of the severity, any change in operations has the potential to negatively impact the bottom line. You may have already seen the first signs of a problem, however, at this point there may be no way to determine the exact nature and extent of financial losses until the restrictions are lifted.
If your business has suffered COVID-19 losses, there may be coverage in your current insurance policies to address some or all of the damage. Commercial property or all-risk policies generally cover damage to your property, but these policies can also include coverages for additional losses, which might be relevant to the Coronavirus outbreak. Two of the most common of these additional lines of coverage include the following.
Though every policy is different, a standard business interruption insurance provision provides “coverage for lost business income and extra expenses incurred during a suspension in operations during a period of restoration.” Most provisions allowing for recovery of loss of income include requirements that the suspension be “caused by direct physical loss to the property from a covered loss.” Keeping in mind that this additional coverage is going to be included in a larger more general policy designed to protect your business’ property, the key component to a successful claim is likely to center on the “direct physical loss” requirement. Some courts have held that a “direct physical loss” generally means that the insured must demonstrate that the property in question suffered some physical change or alteration that interrupted or halted business. Other jurisdictions have determined that “a property sustains a direct physical loss if it is rendered unusable or uninhabitable, even if the property is not tangibly altered.” Notwithstanding whether or not you can show requisite physical damage, all claims for lost income due to business interruption are going to be limited to the “period of restoration.” Each individual policy will expressly define the parameters of the time frame when damages will be paid.
Civil Authority provides coverage for business interruption that arises from an act of “civil authority” such as a State or Federal order/directive to alter day to day activities. Most property policies provide some form of civil authority coverage, but the scope of coverage varies. A typical policy would cover “actual loss of business or rental income and necessary extra expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property other than the described premises caused by or resulting from any covered cause of loss.” The policy will also limit the time period for which claims can be made. Like business interruption insurance, civil authority coverage will require a showing of property damage due to a covered cause.
Disputes as to the compensability of a claim under either of these additional coverages is likely to turn on whether COVID-19 has caused a physical loss to property sufficient to constitute a covered loss. We would advise you to review all of your current insurance policies to determine what your primary policies will cover and to determine if you have any additional coverages that may be triggered by the recent COVID-19 mandated changes to operations.
If you have any questions about this alert, please contact the Litigation, Insurance and Risk Management members of our COVID-19 Response Team indentified below.
Contact information for the complete McGrath North’s COVID-19 Response Team can be found here.
For information regarding additional business-related concerns centered around COVID-19, please visit our COVID-19 Resource Guide here.